By now, you probably know that taking care of your credit is a good thing if you're trying to meet money milestones like moving into your first home or finally upgrading that old clunker. After all, lenders assess your credit to decide whether you'll get the best loan terms or the not-as-great ones — or even whether they'll lend to you at all.
What you might be a little foggier on is exactly how to tell whether your credit is in good shape. The keys to knowing that lie in both credit reports and scores. But while the two terms sound almost interchangeable, they offer different insights into how you've handled credit in the past. So keep reading to understand the primary differences between the two — and why it's important to keep tabs on both.
WHAT'S A CREDIT SCORE?
In a nutshell, your credit score is a three-digit numerical grade that provides a snapshot of your creditworthiness to credit card companies, mortgage lenders, auto lenders, etc. — pretty much anyone who wants to loan you money or extend you a line of credit. Non-lenders, like a future landlord or cell-phone service provider, may also look at your credit score to get a quick indication of your financial health. Here are a few other important things to keep in mind about credit scores.
The most widely used credit score is the FICO score. Although other types of credit scores exist (for example, the VantageScore), the FICO score is the one that's most often referenced by lenders. FICO scores range from 300 to 850; the higher your score, the more likely lenders will be to believe you'll pay back the money you're borrowing. In general, a good score is considered to fall between 700 and 749, and a score of 750 or higher is typically considered excellent.
Five factors make up your FICO score. These include:
Payment history (35 percent of your score). Whether you make credit card payments on time is the most important factor in calculating your score. In fact, according to MyFICO.com, just one 30-day delinquency could cause as much as a 63- to 83-point drop on a FICO score of 793 for a consumer who has never missed a payment before. Multiple late payments can tarnish your number even further.
Amounts owed (30 percent). This takes into account, among other factors, how much you owe across all your credit accounts as well as the percentage of your available credit that you’re actually using (your credit utilization ratio). A higher utilization ratio typically indicates to creditors and lenders that you’re at risk for overspending.
Length of credit history (15 percent). This includes the ages of your oldest credit account, your newest credit account and the average age of all of them. Lenders like to see that you've had a long history of managing credit responsibly.
Credit mix (10 percent). Having a combination of different types of credit accounts, such as credit cards, installment loans and a home mortgage, can boost your score.
New credit (10 percent). When you apply for a new credit account or loan, you trigger a “hard inquiry” on your credit, which dings your score. Thus, opening several lines of credit within a short period of time can hurt your number. Also keep in mind that each time you open a new credit account, it reduces the average length of your credit history.
Your credit score reflects information found in your credit report. Knowing the factors that contribute to your score doesn't necessarily shed light on all the details behind your specific credit history. For that, you'll need to turn to your credit report.
WHAT'S A CREDIT REPORT?
If your credit score is a grade, consider your credit report a transcript that details the past borrowing behaviors that have influenced your score. Here's what to know about a credit report.
It contains your credit history. Aside from basic identifying details like your name, address and Social Security number, your credit report contains information like the date you opened your various credit accounts and loans, your balances, the total loan amounts and credit limits on your accounts and your payment history. It also contains any public-record information like bankruptcies or tax liens that could impact your credit. Most negative dings, such as late payments or accounts in collections, can stay on your credit report for seven years — except for Chapter 7 bankruptcies, which will stay on there for 10 years.
Ready to take the next step? A financial advisor can show you how all the pieces of your financial plan fit together.
You can order your report for free three times a year. Every 12 months, you’re entitled to one free copy of your report from each of the three major credit bureaus — Equifax, Experian and TransUnion — at AnnualCreditReport.com. (FYI: Credit bureaus are also referred to as “consumer reporting agencies.”) Checking your credit reports does not trigger a hard inquiry, so pulling a report will have no negative impact on your credit score.
Your report likely won't contain your credit score. “Many people think that a credit report always comes with a score, when in reality the score is like the leather seats in a car — it’s an upgrade,” says John Ulzheimer, credit pro and author of “The Smart Consumer’s Guide to Good Credit.”
Your credit reports might look different. Equifax, Experian and TransUnion operate independently, which means their reports may contain slightly different information, as some creditors might report to only one or two of the bureaus (there are no legal requirements to report to all three).
THE BIGGEST DIFFERENCES BETWEEN THE 2
Credit reports give you more insight. This is perhaps the biggest difference, as your credit score is just that — a score — but usually gives no indication as to what contributed to the number. That's where the more exhaustive credit report comes in. If you notice your score has dropped, the only way to determine the cause is to look at your credit report and comb through the details for things that could have caused the drop, like missed payments or hard inquiries.
You're only entitled to get credit reports for free. Your credit score, on the other hand, is a little harder to get free of charge. Some credit card companies provide customers free FICO score monitoring, including an estimate of their score either online or in their monthly statements. If your issuer doesn’t offer such a service, MyFICO.com has a free score estimator that you can use to get a rough idea of where you stand.
You can also use sites like Credit.com, CreditKarma.com and CreditSesame.com to get free score estimates from the three major credit bureaus. “Free scores [at least] give you an idea of where your credit stands,” says Beverly Harzog, a consumer credit pro and author of “The Debt Escape Plan.” But for frequent or detailed updates on your credit score, you'll likely have to pay for a credit-monitoring service.
Prospective employers can check your credit report — but not your score. Potential employers can pull a copy of your credit report with your permission. To a hiring manager, a good credit report might indicate that you’ll be responsible on the job or less of a risk for corporate crimes like embezzlement. However, prospective employers do not receive your credit score when they view your report.
Your credit report can reveal mistakes and identity theft. The mistake can be something as innocuous as a typo or incorrect credit limit — or it could be something as serious as finding out someone else has opened accounts and racked up debt in your name. (All the more reason to check your three free reports each year!)
To get errors fixed, you’ll need to contact both the credit bureau and the company that reported the information. Pro tip: Tell each agency in writing what information you believe is inaccurate, as recommended by the Federal Trade Commission. By filing your dispute via certified snail mail, you’ll have confirmation that your complaint was received, which can come in handy if the credit bureau doesn’t respond within the required 30-day window.
Your credit score is likely to change faster than your credit report. If you already subscribe to a credit score monitoring service, you know that your score can fluctuate frequently. This is because creditors are reporting your activity to the credit bureaus on a regular basis. Some credit card issuers do this each month based on your billing cycle.
Meanwhile, your credit reports will look fairly similar from month to month, as long as you are consistently paying your debts on time and you don't open and close accounts frequently.